The banking man’s paradise

Last week’s eminently sensible suggestion by the Greens that Australian banks should pay fees to the Australian tax-payer for the policies that protect them has again illustrated the parlous state of Australia’s political economy.

First of all, why is it only the Greens that have suggested it? The government immediately reiterated its abdication on the issue, reinforcing its acceptance of GFC crisis measures as a new financial architecture. To its credit, the Opposition has suggested an inquiry to assess what the new financial architecture should be but where is it now?

Next cab off the rank is the Greens themselves who have made a major communications blunder in the framing of the debate:

Greens Deputy Leader and banking spokesperson Adam Bandt has outlined a proposal for a ‘Public Support Levy’ on the big four banks in return for the implicit “too-big-to-fail” policy of the government that underwrites their activities.

The 20 basis points levy on bank assets in excess of $100 billion has been costed by the Parliamentary Budget Office and would raise $11 billion over the forward estimates.

The levy mirrors similar levies in Europe that raise on average approximately 0.2% of GDP and is based on International Monetary Fund proposals.

“For many years, especially since the GFC, the big four banks have benefited from an implicit ‘too big to fail’ policy, as the IMF has made clear.”

“Under Labor, the big 4 banks are making more from mortgages, dominating more of the market and enjoying record profits.”

“Everything Labor has done has made it easier for the big 4 banks to make bigger profits off the backs of consumers.”

“It is time the big four banks paid a fair contribution for the public support they receive.”

“The big banks get a discount on their wholesale funding because of the ‘too-big-to-fail’ policy of the government. If they went to wall the taxpayer would bail them out, which means the big 4 get cheaper funds than their competitors, so the taxpayer should get a fair return for this de facto contribution to big bank profits.”

“The big four banks are taking all of the profits while the taxpayers are wearing all of the risk.”

“This moderate levy of 0.2 per cent is in line with IMF proposals and is a fair contribution from the banks for the support they are provided by taxpayer.”

“By limiting the levy to those big 4 banks that are truly ‘too big to fail’, the levy won’t be passed on to consumers as the big banks will face competition from smaller banks who aren’t paying the levy.”

“A levy of this size would be in line with a dozen countries in Europe and would assist in addressing the structural revenue problem in the budget.”

“Such a levy would improve bank competition, going some way to equalising the wholesale funding advantage government policy gives systemic banks over smaller institutions.”

The IMF has recommended charging a fee equivalent to 70% of the funding cost advantage enjoyed by systemic institutions. (IMF, Australia: Addressing Systemic Risk through Higher Loss Absorbency – Technical Note, Nov 2012)

The use of the word “levy” was a very bad idea. “Levy” is close enough to “tax” to allow the banking apologists of the Australian business media to immediately associate what is actually an insurance premium with a “super-profits tax”. Stephen Bartholomeusz, Malcolm Maiden and Andrew Cornell are all examples.

The Government’s primary too-big-to-fail policy is the idled wholesale guarantee, which may have been paid for at the time (but was far too cheap) and has not been paid for ever since, despite contributing to a 2-notch upgrade in bank credit ratings. There are any number of other policies that can be seen in a similar light: RBA CLF, covered bonds, free deposit guarantees, dwelling purchase incentives, RMBS purchases, high immigration and changes to FIRB rules, fiscal incentives for property investment, highly opaque capital rules and policing, and on it goes. But let’s not worry about those today!

Don’t get me wrong, public support for banks is appropriate. The argument needs to be about what kind of support and how it effects the functioning of the market. Support has been at extreme levels since the GFC. Not even the banker’s association bothers to deny that. It focused instead on the costs to shareholders (voters):

Steven Münchenberg, Chief Executive of the ABA, said: “The majority of bank profits are paid through dividends to Mum and Dad shareholders and superannuation funds. Taxing banks’ profits reduces those returns for working Australians saving for their retirement through superannuation accounts and to retirees who are increasingly dependent upon positive business profit growth.”

“Last year, banks paid out a record $19 billion in dividends – 7% more than 2011. In the past five years, banks have paid out $82 billion in dividends.”
“The other impact of the Greens policy would be that banks may need to pass on higher costs to consumers because of the need to maintain profitability. So consumers may end up paying more for banking products and services.

This is not an argument of course. It is a simple threat that creating an appropriate framework for banks will come at the expense of a large block of the voting public. But public policy should not be in the business of protecting shareholders. It’s job is to set appropriate parameters for a functioning market, whatever the particulars of that sector need to be.

My own view is that whatever the benefits derived from the extreme levels of unpaid for support currently surrounding the banks are a false economy. Without the insurance premium you are creating a very active moral hazard that makes an expensive financial crisis more not less likely. Nor is it good enough that we rely on an opaque regulator in APRA to hold back this moral hazard.

More broadly, this debate should be about what is the appropriate structure and charge for the insurance premium in the national interest? That’s the strategic question that the nation needs to answer first. The effects upon sectional interests are tactical and implementation questions only, a distant second.

David Llewellyn-Smith

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.

He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.

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Comments

        • reusachtigeMEMBER

          They should definitely be paying a premium for the insurance they currently receive? But is that like “protection money”?

          • Perhaps, but if someone or something is paying money to the government, it will always be portrayed as a tax.

          • The issues are as I see it –
            1. In times of banking crisis governments or their central bank has always stood behind the banking system even if not every bank

            2. Any tax or levy will be passed on. Banks are incredibly good at increasing fees or interest rates to cover all running costs.

            Regardless of the moral stance on these issues, they do exist.

          • @ peter
            “2. Any tax or levy will be passed on. Banks are incredibly good at increasing fees or interest rates to cover all running costs.”

            That is exactly what this fee is supposed to do.

            Big banks (over $100b) should be forced to pay a fee that will make them less competitive.

        • If your definition of tax is simply that you are paying money to the government, you have robbed the word of any useful meaning.

          If you get something specific in return for the money (a liquidity line, the right to mine minerals and sell them), I can’t see how that’s a tax.

      • Brissy for now

        The Greens should have used the word premium as every home owner these days knows that insurance has changed lately. Costs are skyrocketing and why should banks get insurance for free when Joe Public is paying up big. Market it as insurance of last resort and the idea might get up.

  1. No government should support any bank unless through arm’s length commercial contracts.

    A levy/tax will not work and almost certainly will have the unintended consequences of entrenching the moral hazzard of bankers pay themselves gains and the taxpayer wearing the losses.

    No thinking person could possibly support the Green’s measure without it being part of a total”reform” package which addresses

    • <i which addresses…

      Which addresses what?

      The moral hazard is already well and truly entrenched.

        • So explain to me how taxing Mega Bank does not make moral hazard worse? The tax basically says “pay 20bps pa and the banksters can do what they like”…..Great solution!

          • How can it be worse? The banksters know they will be rescued.

            Of course it would be better if it was part of a package that addressed moral hazard, but lets face it, no government is going to let one of the big 4 go down, and the bankers know that.

    • Spot on Deep T. As I said here when this first raised, it is a bandaid non-solution to the problem it purports to address.

      The real reason the Greens are trotting this out … again … is the looming election, and their recent “divorce” from Labor. It’s called “Product Differentiation” folks.

  2. Is this not essentially the same thing as the proposed Committed Liquidity Facility?

    I can understand debate over whether the CLF is expensive enough, or structured correctly, or not being introduced soon enough. But surely it is already up as a solution for the problem the Greens have raised.

    Am I missing something?

      • Yes, I appreciate that the support has always been there and that the repo is in a loose sense a committed liquidity facility. However the formal CLF slated for Jan 2015 is, as I understand it, an attempt to formally acknowledge, regularise and charge for the support, which seems to be what the Greens are aiming at.

        I’m not trying to argue that the Green’s concerns are wrong, just that the CLF is already there as a solution.

        As DT observes, you have to be very careful how you set these things up to avoid unintended consequences. A simple levy or tax would not seem to connect the cost with relevant behaviours, whereas a properly structured CLF is more likely to do so.

  3. Agree that the Greens where hamfisted, neither a levy not a tax, a fee for service.

    Agree on your final point.

  4. Crocodile Chuck

    David

    Regarding the laundry list of bank friendly policies-you forgot one: covered bonds.